In a settlement with Secretary of State William F. Galvin, State Street Global Advisors agreed to pay a $5 million penalty for its role in managing and selling investors a fund, filled with subprime mortgage-backed securities, that collapsed in 2007.

The $1.6 billion fund, known as Carina CDO Ltd., was one of many vehicles at the time that held collateralized debt obligations, complex securities linked to low-quality mortgages. Carina was structured by Wall Street’s Deutsche Bank Securities to benefit an Illinois hedge fund, Magnetar Capital. State Street Global of Boston was hired for $3.5 million to manage the portfolio, and failed to disclose to investors the hedge fund’s involvement and conflict of interest, Galvin’s office said.

About 16 months after it was created, Carina defaulted, in one of the first failures connected to subprime mortgages. Investors, including pension funds, lost $450 million, but Magnetar reaped big profits because it handpicked some of the riskiest securities in the fund, and then shorted them, or bet they would fall.

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Galvin’s office alleged that State Street Global, a unit of State Street Corp., should have told investors of Magnetar’s involvement behind the scenes. “Without disclosure of this material information, investors were unaware of a potential conflict of interest between Magnetar and other Carina investors,’’ the settlement agreement said, thus they could not make fully informed investment decisions.

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Magnetar was involved in 26 similar transactions involving the same kind of mortgage-linked securities, Galvin’s office said. Neither Deutsche Bank nor Magnetar was named as a party in the settlement.

Deutsche Bank declined to comment. A spokesman for Magnetar could not be reached.

State Street agreed to pay the state a $1.5 million civil fine plus the $3.5 million in fees it earned on the Carina deal. The company said it neither admitted nor denied the findings or conclusions by Galvin.

But officials with Galvin’s office said State Street admitted a number of the statements of fact in the case by signing the settlement.

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The settlement cited a number of e-mails that suggest State Street was aware that Magnetar was both helping select some securities in the fund and betting against them. In December 2006, for instance, an e-mail from a Magnetar executive to State Street’s then-chief of structured products disclosed the conflict outright. He said he wanted to strategize on the “names for the CDO bucket,’’ and that he planned to trade against a number of them.

Galvin indicated in a statement that his investigation is not over: “My office is actively investigating how banks misled buyers of securitized debt instruments backed by subprime mortgages.’’

Chris Reidy of the Globe staff contributed to this report. Beth Healy can be reached at bhealy@globe.com.